Which Energy Company Is the Best Dividend Stock?

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A dream stock for any dividend seeker would meet three criteria. It would pay a generous current dividend, which it supports with strong financials, and has clear visibility to increase the payout in the future. While several energy stocks meet some, or all, of this criteria, the best of the bunch is Canadian energy infrastructure giant Enbridge (ENB -1.26%). Here's why.

An above average yield

As the following chart shows, Enbridge's current dividend rate is solid compared to others in the energy sector, and well above the market's average:

Data source: Yahoo! Finance.

While its current yield is not as high as some other energy stocks, especially MLPs like Enterprise Products Partners, that is by design. For perspective, Enterprise Products Partners typically pays out roughly two-thirds of its cash flow to investors while Enbridge only pays out about half of its annual cash flow. That decision to retain a substantial portion of cash flow is one reason why Enbridge has not only maintained its payout during the oil market downturn but increased it. Contrast this with Williams Companies and Kinder Morgan, which both had to significantly reduce their payouts because they had been paying out nearly every dollar they brought in.

Rock solid financials

Another reason why Enbridge has been able to maintain its payout is due to its strong underlying financials. Currently, 96% of the company's cash flow comes from take-or-pay or similar contracts, while less than 5% of its cash flow has any volume or commodity price risk, which leads to very stable cash flow. Contrast this with Kinder Morgan, for example, which gets 91% of its income from fee-based sources, though only 67% is from take-or-pay contracts, while 9% has direct commodity price exposure. That contract situation caused a bit more volatility in Kinder Morgan's cash flow during the downturn. Meanwhile, commodity price exposure is par for the course at oil giants like Exxon, which creates significant volatility in cash flow.

Another pillar of strength at Enbridge is its balance sheet, evidenced by a strong investment-grade credit rating of Baa2/BBB/BBB+. Contrast that rating with Williams Companies, which at Ba2/BB has junk-rated credit while Kinder Morgan's Baa3/BBB- rating is at the bottom rung of investment grade. Those weaker credit ratings are another reason why both companies had to cut their dividends during the downturn and divert some of that cash to bolster their balance sheets.

An excellent growth profile

Enbridge's robust current yield and solid underlying financials make it a good income stock for today. However, what really sets it apart is its growth potential, which will turn it into an outstanding dividend stock in the future. As the following chart shows, the company boasts unrivaled dividend growth, supported by a gargantuan project backlog:

Data sources: Company press releases and investors presentations.

Most energy companies do not have much, if any, visibility on future dividend increases due to the oil market downturn or internal financial problems. Not so with Enbridge, which firmly believes it can deliver low double-digit dividend growth for nearly a decade. That is not just a stretch goal but supported by the fact that Enbridge has an industry-leading backlog of fee-based projects in development along with an enormous supply of potential projects lined up to drive growth early next decade.

Investor takeaway

Enbridge might not have the highest yield in the sector at the moment, but it has one of the best overall payouts thanks to its secure cash flow, relatively low payout ratio, and strong balance sheet. Further, what takes it to the next level is its growth potential, which is simply unrivaled in the sector. These factors combine to make Enbridge the best energy dividend stock to buy right now.